Fair Isaac: Strategically Stronger On Adeptra Acquisition

Aug.17.12 | About: Fair Isaac (FICO)

Fair Isaac Corporation (FICO) announced on Thursday that it has agreed to acquire UK-based Adeptra Ltd. in a transaction valuing the company at $115 million.

The Deal

Fair Isaac Corporation announced that it will acquire Adeptra in an all cash transaction valuing the company at $115 million. Privately-held Adeptra is a leader in cloud-based customer engagement and risk intervention systems. Its solutions allow companies to communicate with their customers in real time, and it has 50 major clients across the world. The company helps its customers in fraud resolution, payment plans and confirmations.

Adeptra reported annual revenues of $38.2 million in 2011, up 15.7% on the year. EBITDA rose 165% to $2.9 million. Revenues for the first six months of 2012 rose 33.9% to $24.3 million, while EBITDA rose 146% to $2.6 million. The deal values the company at roughly 2.3 times annual revenues, based on a conservative $50 million revenue estimate for the full year. The company is valued at roughly 23 times annual EBITDA on a conservative $5 million estimate.

Fair Isaac sees strategic synergies from the acquisition. FICO's decision management solution and Adeptra's customer engagement and risk intervention platform provide full-cycle solutions. The integration allows the company to accelerate success in the fast-growing mobile economy.

The deal is expected to close as soon as September, and be accretive to 2013's earnings.


Fair Isaac reported its third quarter results on the 25th of July. Third quarter revenues came in at $160 million, up 7% on the year. GAAP diluted earnings per share came in at $0.59. The company operates with $274 million in cash and equivalents, sufficient to finance the acquisition.

Valued at $1.5 billion, the market values the company at 2.5 times annual revenues and 17 times trailing annual earnings. Currently, Fair Isaac pays a quarterly dividend of $0.02 per share, for an annual dividend yield of 0.2%.

Investment Thesis

Shares of Fair Isaac have returned 24% so far in 2012. Shares quickly moved upwards from $35 in January, to trade within a $40-$45 trading range in the remainder of the year thus far.

Banks are slowly coming back in the market for consumer lending. For them, it is crucial to have good ways to distinguish good from bad credit, which boosts Fair Isaac's business. The company is actively trying to adjust its famous "FICO" scores to update it with more real time information, and the acquisition of Adeptra fits perfectly within the strategy.

Over the past years, revenues fell from $745 million in 2008 to $620 million in 2011, as consumer lending fell over time. Earnings per share rose from $1.64 to $1.79 over that time period. The company repurchased over 20% of its shares outstanding during that time period. Shares have traded flat for the past five years, but have seen steep declines in the middle of the crisis.

Investors reacted favorably to the announcement of the deal, and the announcement of another $150 million share buyback program. The program is sufficient to retire 10% of Fair Iscaac's shares outstanding. Shares rose 1.5% in Wednesday's trading session.

I think that Fair Isaac made a strategically strong acquisition, which boosts the company's growth profile, amid increasing mobile adoption. Furthermore, the company remains committed to retire shares, boosting earnings per shares. I see no immediate triggers for an upside move in the short term, but would be confident to hold shares for the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.